by

Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

Washington, D.C.
January 13, 2010

Thank you, Chairman Schapiro. I, too, would like to thank all of the staff and, in particular, the individuals in the Office of Market Supervision from the Division of Trading and Markets, for their hard and excellent work in preparing for today's open meeting. Thank you so much for the fruitful discussions you have had with me and my counsel, Cyndi Rodriguez, about these critical questions. And I am particularly pleased to join my colleagues in welcoming our new Division Director. Robert, it’s particularly important to have you with us as we consider such significant issues that go to the core of the Commission’s mission.

I am happy to support the staff's proposal.

As I have stated in past open meetings, I am particularly concerned with sponsored access and have repeatedly called for Commission consideration in this area. These days, sponsored access has become a significant activity in our marketplace. To reiterate some facts and figures we’ve already heard this morning, there are reports that sponsored access trading volume currently accounts for 50% of overall average daily trading volume in the U.S. equities market, with direct or filtered market access share at 12% and the unfortunately named “naked” or unfiltered access share at approximately 38% of the average daily volume. I believe sponsored access presents unacceptable risks to the marketplace, and addressing these risks is important.

I am particularly concerned with the traditional sponsored access arrangements in which a broker-dealer determines a client’s ability to access market centers directly and then allows the client to trade directly into the markets without monitoring its individual orders prior to execution. I believe these arrangements may raise concerns about unregulated trading firms and persons accessing market centers without the responsibilities and regulatory oversight applied to broker-dealers. Without these ongoing controls, there exists a potential for dire consequences.

For instance, under the unfiltered access model, perhaps the mother of all concerns is that without effective pre- and post-trade monitoring of sponsored participants’ overall trading activities, certain trading restrictions can be overlooked and potentially lead to a disaster. In the worst case scenario, electronic fat finger errors or intentional trading fraud could topple not only the sponsored participant, but also the sponsoring broker and its counter parties, leading to an uncontrollable domino effect that could potentially destabilize the markets.

I therefore agree with many major market participants who feel that something should be done in terms of standardizing the overall sponsored access arrangements and establishing uniform risk controls. I recognize, appreciate, and indeed applaud the SROs’ efforts to address these issues through their guidance and rules. Nevertheless, I support the Commission’s proposal to supplement the SRO’s rules and build upon the requirements relating to risk controls. The proposal could bring order to the patchwork of oversight currently used by brokers and trading venues. It also could level the playing field so that no one segment of the market has a clear advantage due to lack of industry uniformity in risk checks.

Specifically, I believe the proposal could provide uniformity and standardization in requisite pre- and post-trade checks on order flow being sent to the markets — which should go a long way in paving the way for fair competition. The proposed rule also would clearly require that the risk management controls be under the direct and exclusive control of the sponsoring broker-dealer, rather than the firm receiving sponsored access or other third parties.

I also agree with the proposal’s requirement to mandate regular reviews by the broker-dealer of the risk management controls and supervisory procedures. Given the constant development and growth in today’s electronic environment, these regular reviews should help ensure that the broker-dealer’s risk controls keep pace with changes in the markets and trading practices and thereby remain effective.

That said, additional regulation does not amount to the elimination of systemic risk. All major participants should continue with their due diligence and scheduled exams to make sure that sponsored access arrangements remain a beneficial force in the markets.

Finally, I also agree with the proposal to broadly apply the proposed risk controls to all forms of market access by broker-dealers — not only to sponsored or direct access, but also to traditional agency brokerage arrangements with customers and proprietary trading. In these latter situations, the broker-dealer already should have similar controls in place, and the proposed rule should simply be reinforcing existing requirements.

However, because the proposed rule would only apply to brokers or dealers with access to an exchange or ATS, I do have some concerns with the scenario in which non broker-dealers offer sponsored access to, for example, ATSs and thus would not be covered under the proposal. I look forward to receiving public comment on whether this is a major issue in the marketplace and possible approaches that the Commission could undertake to effectively address this form of market access.

Thank you all again for your efforts, and I just have a few questions.